Discounted Cash Flow

Formulas
F

0
….
1 2 n-1 n

Principles of Engineering Economic Analysis, 5th edition

 Discounted Cash Flow
Formulas
F = P(1 + i)n
F = P(F|P i%,n) single sum, future worth factor

P = F(1 + i)-n
P = F(P|F i%,n) single sum, present worth factor

Principles of Engineering Economic Analysis, 5th edition

 Computing the Present Worth of
Multiple Cash flows

(2.12)

(2.13)

Principles of Engineering Economic Analysis, 5th edition

 Computing the Future
worth of Multiple cash
Flows
(2.15)

(2.16)

Principles of Engineering Economic Analysis, 5th edition

 DCF Uniform Series Formulas

A A A A A A

P occurs 1 period before first A

Principles of Engineering Economic Analysis, 5th edition

 P=A
[ (1 + i)n – 1
i(1 + i) n
] uniform series, present worth factor
= A(P|A i%,n) =PV(i%,n,-A)

[ ]
i(1 + i)n
A=P uniform series, capital recovery factor
(1 + i) – 1
n
= P(A|P i%,n) =PMT(i%,n,-P)

F=A
[ (1 + i)n – 1
i ] uniform series, future worth factor
= A(F|A i%,n) =FV(i%,n,-A)

[ ]
A=F i uniform series, sinking fund factor
(1 + i)n – 1 = F(A|F i%,n) =PMT(i%,n,,-F)

Principles of Engineering Economic Analysis, 5th edition

 Gradient Series
0 t=1
At= { A t-1+G t = 2,
…,n

or

A t = (t-1)G t = 1,…,n
(n-1)G Note: n-1, not n

(n-2)G
2G
G

…
0 1 2 3 n-1 n

Principles of Engineering Economic Analysis, 5th edition

 Converting Gradient Series
Converting gradient series to present
worth

P=G
(2.35)

P=G
(2.36)
P = G(P|G i%, n)
(2.37)
Principles of Engineering Economic Analysis, 5th edition
 Converting Gradient Series - II
Converting gradient series to annual worth

A=G

A=G

A = G(A|G i%, n)
(2.38)

Principles of Engineering Economic Analysis, 5th edition

 Converting Gradient Series - III
Converting gradient series to future worth

F=G
(2.39)

F=G

F = G(F|G i%, n) (not provided in the

tables)
Principles of Engineering Economic Analysis, 5th edition
 Example 2.28
Maintenance costs for a particular production
machine increase by $1,000/year over the 5-yr
life of the machine. The initial maintenance cost
is $3,000. Using an interest rate of 8%
compounded annually, determine the present
worth equivalent for the maintenance costs.

Principles of Engineering Economic Analysis, 5th edition

 Example 2.28

Principles of Engineering Economic Analysis, 5th edition

 Example 2.28
Maintenance costs for a particular production
machine increase by $1,000/year over the 5-yr
life of the machine. The initial maintenance cost
is $3,000. Using an interest rate of 8%
compounded annually, determine the present
worth equivalent for the maintenance costs.
P = $3,000(P|A 8%,5) + $1,000(P|G 8%,5)
P = $3,000(3.99271) + $1,000(7.372.43) = $19,350.5
OR
P = ($3,000 + $1,000(A|G 8%,5))(P|A 8%,5)
P = ($3,000 + $1,000(1.846.47))(3.99271) =
$19,350.55 or
P =1000*NPV(8%,3,4,5,6,7) = $19,350.56
Principles of Engineering Economic Analysis, 5th edition
Principles of Engineering Economic Analysis, 5th edition
 Example 2.29
Amanda Dearman made 5 annual deposits into a
fund that paid 8% compound annual interest. Her
first deposit was $800; each successive deposit was
$100 less than the previous deposit. How much was
in the fund immediately after the 5th deposit?

Principles of Engineering Economic Analysis, 5th edition

 Example 2.29

Principles of Engineering Economic Analysis, 5th edition

 Example 2.29
Amanda Dearman made 5 annual deposits into a
fund that paid 8% compound annual interest. Her
first deposit was $800; each successive deposit was
$100 less than the previous deposit. How much was
in the fund immediately after the 5th deposit?
A = $800 - $100(A|G 8%,5) = $800 - $100(1.84647) =
$615.35
F = $615.35(F|A 8%,5) = $615.35(5.86660) =
$3,610.01

Principles of Engineering Economic Analysis, 5th edition

 Example 2.29
Amanda Dearman made 5 annual deposits into a
fund that paid 8% compound annual interest. Her
first deposit was $800; each successive deposit
was $100 less than the previous deposit. How
much was in the fund immediately after the 5th
deposit?
A = $800 - $100(A|G 8%,5) = $800 -
$100(1.84647) = $615.35
F = $615.35(F|A 8%,5) = $615.35(5.86660) =
$3,6101.01
F =(FV(8%,5,,-NPV(8%,800,700,600,500,400))
F = $3,610.03

Principles of Engineering Economic Analysis, 5th edition

Principles of Engineering Economic Analysis, 5th edition
 P=G
[ 1 - (1 + ni)(1 + i)-n
i2
gradient series, present worth factor
= G(P|G i%,n)

A=G
[] (1 + i)n – (1 + ni)
i[(1 + i)n – 1]
gradient-to-uniform series conversion
factor
= G(A|G i%,n)

]
[
F=G gradient series, future worth factor
(1 + i)n – (1 + ni)
= A(F|G i%,n)
i2

]
Principles of Engineering Economic Analysis, 5th edition
 Geometric Series
A t = A t-1(1+j) t = 2,
…,n

or

A t = A1(1+j)t-1 t = 1,…,n A1(1+j)n-1 Note: n-1 not n

A1(1+j)n-2
A1(1+j)2
A1(1+j)
A1

…
n-1 n
0 1 2 3

Principles of Engineering Economic Analysis, 5th edition

 Converting Geometric Series – I
Converting a geometric series to a present worth

(2.42)

(2.42)

(2.44)

(2.43)

Principles of Engineering Economic Analysis, 5th edition

 Converting Geometric Series – II
Converting a geometric series to a future worth

(2.45)
F = nA1(1+i)n-1 i
=j

F = A1(F|A1 i%,j%,n)
Note: (F|A1 i%,j%,n) = (F|A1 j%,iNotice the symmetry
%,n)
Principles of Engineering Economic Analysis, 5th edition
 Example 2.30
A firm is considering purchasing a new machine. It
will have maintenance costs that increase 8% per
year. An initial maintenance cost of $1,000 is
expected. Using a 10% interest rate, what present
worth cost is equivalent to the cash flows for
maintenance of the machine over its 15-year
expected life?

Principles of Engineering Economic Analysis, 5th edition

 Example 2.30
A firm is considering purchasing a new machine. It
will have maintenance costs that increase 8% per
year. An initial maintenance cost of $1,000 is
expected. Using a 10% interest rate, what present
worth cost is equivalent to the cash flows for
maintenance of the machine over its 15-year
A1 = $1,000,
expected life?i = 10%, j = 8%, n = 15, P = ?
P = $1,000(P|A110%,8%,15) = $1,000(12.03040) =
$12,030.40
P
=1000*NPV(10%,1,1.08,1.08^2,1.08^3,1.08^4,1.08^5
,

Principles of Engineering Economic Analysis, 5th edition

1.08^6,1.08^7,1.08^8,1.08^9,1.08^10,1.08^11,1.
 Example 2.30
A firm is considering purchasing a new machine. It
will have maintenance costs that increase 8% per
year. An initial maintenance cost of $1,000 is
expected. Using a 10% interest rate, what present
worth cost is equivalent to the cash flows for
maintenance of the machine over its 15-year
expected life?
A1 = $1,000, i = 10%, j = 8%, n = 15, P = ?
P = $1,000(P|A110%,8%,15) = $1,000(12.03040) =
$12,030.40
P
=1000*NPV(10%,1,1.08,1.08^2,1.08^3,1.08^4,1.
08^5,
Principles of Engineering Economic Analysis, 5th edition
Principles of Engineering Economic Analysis, 5th edition
 Example 2.31
Mattie Bookhout deposits her annual bonus in a
savings account that pays 8% compound annual
interest. Her annual bonus is expected to increase
by 10% each year. If her initial deposit is $500,
how much will be in her account immediately after
her 10th deposit?
A1 = $500, i = 8%, j = 10%, n = 10, F = ?
F = $500(F|A1 8%,10%,10) = $500(21.74087)
F = $10,870.44 Excel)

Principles of Engineering Economic Analysis, 5th edition

Principles of Engineering Economic Analysis, 5th edition
 Example 2.32
Julian Stewart invested $100,000 in a limited
partnership in a natural gas drilling project. His net
revenue the 1st year was $25,000. Each year,
thereafter, his revenue decreased 10%/yr. Based on
a 12% TVOM, what is the present worth of his
investment over a 20-year period?

A1 = $25,000, i = 12%, j = -10%, n = 20, P = ?

P = -$100,000 + $25,000(P|A1 12%,-10%,20)
P = -$100,000 + $25,000[1 – (0.90)20(1.12)-20]/(0.12
+ 0.10)
P = $12,204.15

Principles of Engineering Economic Analysis, 5th edition

Principles of Engineering Economic Analysis, 5th edition
 P = A1
[1 - (1 + j)n(1 + i)-n
i-j
i≠j

]
P = nA1/(1 + i) i=j
geometric series, present worth factor

P = A1(P|A1 i%,j%,n)

F = A1
[(1 + i)n – (1 + j)n
i-j
i≠j
geometric series, future worth factor

]
F = nA1(1 + i)n-1 i=j
F = A1(F|A1 i%,j%,n)

Principles of Engineering Economic Analysis, 5th edition